July 12, 2019 / 2:33 PM / 5 months ago

TREASURIES-Yields inch up, rate cut bets unmoved by inflation gain

    By Kate Duguid
    NEW YORK, July 12 (Reuters) - Treasury yields rose modestly
on Friday, largely unmoved by stronger-than-expected producer
price data as market expectations of an interest rate cut in
July held firm. 
    U.S. producer prices rose slightly in June as the cost of
energy and other goods dropped for a second straight month,
beating economists' expectations that prices would be unchanged.
 The Labor Department report comes on the heels of strong
consumer price data published on Thursday, suggesting overall
inflation could continue to rise moderately despite the gains in
consumer prices.
    Inflation has consistently undershot the Fed's target and
has been cited by the central bank as a risk as it weighs
cutting interest rates in July for the first time since 2015.
But market expectations of a rate cut were not swayed by the
evidence of some inflationary pressure. 
    "The trend is what the committee wants to see. But in a week
where we heard (Fed) Chairman (Jerome) Powell basically say that
the very strong labor market data was a positive print and
that's it, one individual dataset will not sway or set the
committee's outlook going forward," said Michael Lorizio, senior
fixed income trader at Manulife Investment Management.
    "You probably have to keep that in mind looking at the
inflation data over yesterday and today." 
    Powell on Wednesday delivered testimony to Congress in which
he set the stage for a rate cut this month, focusing
particularly on the threat the U.S.-China trade war poses to the
economy, while highlighting broader global weakness. Powell also
downplayed a strong June jobs report and dismissed claims that
the U.S. labor market is hot. 
    The two-year Treasury note yield, which reflects
market sentiment about changes in interest rate policy, was up
less than half a basis point to 1.855%. Gains were slightly
larger at the long end of the yield curve, with the benchmark
10-year note up 1.1 basis points to 2.131%, and the
30-year bond yield up 1.8 basis points to 2.657%. 
    Expectations of a 50-basis point interest-rate cut in July
rose modestly, up to 24.5% from 19.9% on Thursday, according to
CME Group's FedWatch Tool. A 25-point cut has been fully priced
in by the market. 
    "The market reaction is probably what one would expect on a
beat, which is minor bearish pressure and not much more," said
      July 12 Friday 10:15AM New York / 1415 GMT
 US T BONDS SEP/d              153-11/32    -6/32     
 10YR TNotes SE/d              126-248/256  -1/32     
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             2.1075       2.1477    -0.009
 Six-month bills               2.025        2.0796    -0.003
 Two-year note                 99-143/256   1.8553    0.003
 Three-year note               99-190/256   1.8387    0.006
 Five-year note                99-100/256   1.8792    0.003
 Seven-year note               99-60/256    1.9933    0.005
 10-year note                  102-40/256   2.1306    0.011
 30-year bond                  104-116/256  2.6578    0.019
         YIELD CURVE           Last (bps)   Net       
 10-year vs 2-year yield       27.40        0.20      
 30-year vs 5-year yield       77.70        1.30      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap         4.25         0.00    
 U.S. 3-year dollar swap         1.25         0.00    
 U.S. 5-year dollar swap        -0.75         0.00    
 U.S. 10-year dollar swap       -5.25         0.00    
 U.S. 30-year dollar swap      -33.50        -0.50    

 (Reporting by Kate Duguid; Editing by Dan Grebler)
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